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Fourth Blog – Why the Wealth Tax Won’t Work

In the last blog, I raised the issue of taxing wealth and suggested that is what those who wish to tax the wealthiest really want to do. However, taxing wealth is unconstitutinal just as taxing income was unconstitutional prior to the passage of the 16th Amendment in 1913. That provision specifically limits taxation to “income.”
Income is defined broadly, so that income from wages and salaries, for example, is described as “ordinary income” and income from the sale of appreciated assets is described as “capital gains.” The difference is that the former comes from the employment of labor and the later from the employment of capital. Ordinary income is taxed at rates up to 39.6% (on earnings over $400,000) and capital gains is taxed at 20% for those paying 39.6% and 15% for those taxed at lower ordinaty income tax rates. (For those paying 15% or less, there is no capital gains tax).
All of this asks the question of why the Constitution prohibits taxation on individuals and the amendment only allows taxation on income. The answer, I would guess, is that the founders were protecting the individual from ravenous government by limiting the government’s tax reach to income only and not to assets built or held by individuals.
Therefore, we should be grateful that the right to tax is so limited that only money properly described as “ordinary income” or “capital gains” can be taxed when earned or when the asset is sold. That gives an individual some choice on what is exposed to taxation.